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The war for Libya’s oil

Derek Brower reports from inside the rebel-held east of the country

EAST Libya’s rebellion against Muammar Qadhafi was a month old when, on 17 March, the colonel’s forces and their truck-mounted anti-aircraft guns arrived in Zueitina, a dusty, coastal town about 5 km northwest of Ajdabiya.

They shot everyone they could find. Then they moved onto the oil installations. Rebel forces appeared, trapping some of Qadhafi’s men and killing 10 of them. But as the loyalists retreated, they unleashed a barrage of missiles from a BM-21, the notorious Soviet-made mobile Grad multiple-rocket launcher. “It entered there,” said Saad Hamid, safety manager of the Zueitina power station, pointing to a puncture in the side of the burnt-out 15m-tonne oil-storage tank. The single strike crippled half of the station’s output, which supplies the rebel stronghold of Benghazi, 160 km to the north. The fire burned for six days.

Three weeks later, a small unit of Qadhafi forces crossed the desert several hundred kilometres to the south. They reached a gasoline station, ostensibly under rebel control, and commandeered its fuel. Then, once they were within distance of the surface facilities at the Misla oilfield, almost 600 km southeast of Benghazi, they unleashed their Grads again.

Remembering the dead: photographs of the young men who have died cover walls in Benghazi.

The missiles damaged a power-generation unit supplying the field with electricity, processing facilities, a fuel tank, a pipeline manifold and metering equipment. Three workers were killed. The fire burned for a day. Misla, producing 100,000 barrels a day (b/d) of oil, was immediately knocked out. But, because it shares surface facilities with Misla, the Sarir oilfield, which was producing about 200,000 b/d, was also shut down.

Such was the force of the Misla attack, and so daring the foray by Qadhafi’s troops to reach it, that the rebels assumed Nato’s weaponry had done the damage. The coalition of willing Western powers, which began its assault on Qadhafi’s military on 19 March, had messed up before: on 2 April Nato planes bombed rebel tanks on the outskirts of Brega, killing almost a dozen insurgents.

But the assault on Misla, like the attack on Zueitina, was Qadhafi’s work. And, believe sources in the rebel-held east, National Oil Company (NOC), the state-owned petroleum firm that controlled Libya’s energy sector until the conflict began, probably gave his army the intelligence it needed to shut down Misla and Sarir with a single strike.

The rebels say they are fighting to liberate the country from Qadhafi’s tyranny. The loyalists say they are quashing a rebellion led by al-Qaeda and other outsiders. Nato says it is bombing Libya to defend civilians. But the conflict is a war for the country’s oil.

Whichever side controls Libya’s petroleum industry – its fields, pipelines, refineries and ports – will triumph. And whichever side triumphs will determine Libya’s future as an oil exporter. To the victors and their international allies will go the spoils of the war: 44 billion barrels of Libya’s highly prized light, sweet, paraffin-rich crude.

A grim battle

For now, a grim battle for control of fuel continues along the lines established at the beginning of the conflict. The rebellion began on 17 February. But within five days, Qadhafi pledged a scorched-earth strategy to shatter his country’s oil industry. Special forces would be dispatched to sabotage pipelines and other infrastructure critical to energy production.

Getting the boot: graffiti artists take aim at Muammar Qadhafi.

Alongside a vicious campaign to demolish Misrata, Ajdabiya, and Benghazi – hotbeds of the rebellion – his forces would destroy the ports, the electricity-generation facilities, and the refineries needed by both the “liberated” population and its army of anti-government irregulars.

As international sanctions tightened against his regime, “Mad Dog” wanted to make sure his enemies could secure neither the money from exports of oil, nor the fuel to sustain the rebellion.

The strategy has only partially worked – so far. The destruction of refining, export, gas and electricity-generation and transmission capacity has effectively cut the country’s network of pipelines in half, preventing, for example, gas from Brega reaching the Swiss-built generation facilities in Zueitina. But the rebel-held east still has options. The pipeline linking Misla and Sarir to the Marsa el Hariga port, just east of Tobruk on the northern coast of the rebel-held east, has not been damaged, but stands empty and available at short notice.

Precautionary shut down

Even that is a feat. Arabian Gulf Oil (Agoco), once a unit of NOC but now under rebel control, says it successfully managed a precautionary shut down of the line in the days after the 6 April attack on Misla. This is more difficult than it sounds. A UK-based advisor to Agoco who is now in Benghazi advising the Transitional National Council (TNC), the fledgling rebel government, says the waxy residue left by Libyan crude as it flows to Tobruk would have turned the pipeline into the “longest candle in the world” if the flow of oil had ceased too abruptly, or been damaged in an attack.

And the rebels have managed to sell one cargo of oil: 1 million barrels lifted by international trading firm Vitol and sold at a per-barrel price of Brent minus $1 a barrel in a contract Agoco says involved Barclays Bank. (Barclays says it has no record of the deal and was in no way involved in it.)

Vitol’s cargo left Marsa el Hariga on 7 April and earned the TNC almost $120 million. Two other cargoes have also left Tobruk since the fighting began in February. But income from both the 1 million barrel shipment sold to a Chinese firm and the 600,000 barrel load said by Agoco to have been bought by Austria’s OMV went to Tripoli, under terms agreed before the war erupted.

Nonetheless, thanks to the attack on Misla, Tobruk’s storage tanks are now empty, says Agoco. Petroleum Economist visited the port twice in April and, beyond the town’s small refinery, there was no sign of activity. But this could change soon. Agoco sources said that production from Misla and Sarir could begin “within weeks”. A “technical team”, including military forces, has been dispatched to the fields. But details are sketchy, in part because the TNC doesn’t wish to alert its enemies in Tripoli to any export plans. The last attack on Misla coincided with news that Tobruk was to load a cargo a day later.

The Misla attack – we were shown extensive footage of the aftermath – affected surface facilities, but the wells were not damaged. Agoco reckons output of 250,000-280,000 b/d is feasible once the repairs are made. But, in reality, only the technicians now in Misla know the extent of the damage and even basic communication in the east has become a struggle.

Exports of any volumes from the two oilfields would be a vital lifeline for the rebel-held territory. “I’m running a war economy and I’m almost running it on empty,” Ali Tarhouni, the TNC’s finance minister told us in Benghazi. If exports can be brought up to 250,000 b/d – equivalent to a Suezmax topped to the brim leaving Tobruk every four days – they would earn the rebels around $0.85bn a month. Even that would be insufficient to run the rebel economy properly, believes Tarhouni.

But only a tiny trickle of funds, such as $25 million promised by the US government, is flowing to Benghazi now. Oil-export revenue would give the rebels a genuine war chest. It needs one before desperation sets in.

Benghazi, Libya’s second-largest city, had a population of just over 1 million before the conflict started. But this number has grown as civilians caught in the fighting along the coastal road have fled to the city. Given its precarious existence as the rebel capital, Benghazi’s survival so far is a triumph. Brutal fighting from early in the rebellion has deeply scarred the south of the city. Nato has kept Qadhafi’s forces at bay since then.

Foment on the streets

But for all the optimism in the east, there is foment on the streets. We witnessed a lynching one night in Benghazi’s main square. Other journalists have also witnessed murder on the streets in the rebel capital. Anger at Qadhafi is, at times, directed at Nato for doing too little. The few Benghazi residents who are even aware of the TNC’s existence are also upset that their nascent government has not yet imposed order in their city. The risk of implosion, or factional fighting, in the rebels’ ranks is palpable. And Kalashnikov-armed youths are everywhere.

So to sustain “liberated” Libya, the rebels need money. Already dirt-poor before the uprising, the east is running short of fuel, food and water. Prices for staples have soared since the conflict started. Poverty and inflation will do nothing to secure the TNC’s legitimacy. Qatar Petroleum is supplying some gasoline “as a gift to the people of Libya”, says an industry insider  – part of that country’s mystifying regional diplomatic strategy. And the east has also been draining a 25,000 barrel cargo from a Greek-flagged, Tripoli-bound ship that rebel-pirates seized offshore Benghazi a few weeks ago.

Both the 20,000 b/d Tobruk refinery and a 10,000 b/d processing plant in Benghazi are still pumping out fuel oil. And rumours of new supplies of gasoline from privately owned trading houses willing to dock in eastern Libya persist. (So do rumours of traders willing to break sanctions and supply Qadhafi’s regime.)

But even in Benghazi, many gasoline filling stations have run dry and long lines of cars wait outside the ones that still have fuel to sell (for about $0.10 a litre).

Part of Tarhouni’s problem is that international sanctions against Qadhafi’s government also cover the rebellious east. A way around this, he believes, is to get access to billions of dollars of regime funds that have been frozen by the foreign countries holding them. The Tripoli government, which says the asset freezing is illegal, claims the funds amount to $120 billion, although they may be much less. At the very least, the TNC wants to use these assets as collateral to secure short-term loans from sympathetic countries.

This is difficult, because Tarhouni and the TNC must first persuade the UN Security Council and other nations that freeing government cash for the rebels would be legal. Germany, a reluctant Nato member, and other countries aren’t keen, even though the Contact Group of nations supporting the rebellion agreed in Doha on 13 April to establish a mechanism to finance the TNC. John McCain, the US senator who ran against Barack Obama for the White House in 2008, visited Benghazi on 22 April and has implored his country to do more to support the rebels. But, after the war in Iraq, such calls from the right wing of US politics make many other countries uneasy.

Meanwhile, restarting the oilfields in the south, while critical, depends on their being secured against another attack. And even as they besiege Misrata and fight along the Brega-to-Ajdabiya highway, Qadhafi’s forces remain capable of missions to knock out yet more energy infrastructure.

Unarmed rebels

The rebels, however, are on their own powerless against such attacks. Benghazi and Ajdabiya are defended, but not by the lightly armed insurgents, who are a picture of courage mixed with disorganisation. Their weaponry includes jury-rigged rockets dismantled from aircraft and mounted on pick-up trucks; 0.50-calibre Browning machine guns welded to vehicles to make the ubiquitous technicals; and ageing Russian and Chinese Kalashnikovs. Some insurgents join the frontline carrying arms for which they have no ammunition. Their heaviest artillery is typically refurbished, or recovered from defeated loyalists.

These youthful “freedom fighters”, as Benghazi’s propagandists refer to them, lack officers in the field and even basic communications on the frontline. The mobile-phone network they rely on, Libyana, is patchy. Only a few VIPs have been given priority numbers that can receive international calls. Even a connection is difficult for others.

At the rebel’s eastern checkpoint in Ajdabiya, the news of enemy movement arrives from the vehicles travelling back from the west. The TNC says columns of spies in Ras Lanuf, Brega and Misrata keep them informed. But with few radios or satellite phones in the hands of rebels, the timeliness of such intelligence is doubtful.

And with few tanks or other all-terrain vehicles in their arsenal, the rebels can travel largely by road only, leaving them repeatedly exposed to attacks from the desert, traversable by tank, or from the sea. As we interviewed workers at the Zueitina power station on 13 April, a message arrived to say that loyalist troops were approaching by boat, aiming to finish the job on the power station. So poor is the intelligence that such rumours are impossible to verify.

So it is not the rebels, but Nato’s air power that has now stopped Qadhafi’s forces between Brega and Ajdabiya; and that prevented the loyalists from demolishing Benghazi in March. Dozens of burnt-out tanks, bombed by French Mirages, litter the road from Ajdabiya north to Benghazi. Of all the foreign leaders who have backed the rebellion, President Nicolas Sarkozy of France has won most gratitude.

The tactical battle along the coastal road reflects the mismatch between the forces on the ground. The rebels do not win new territory on their own. Whether by co-ordination with Nato or not, they engage their enemy and, when the loyalists in turn expose their position by shelling back towards the rebels, Nato strikes from the air. This is a daily back-and-forth that yields little territorial advantage to either side. Military officials within Nato now publicly say the war is approaching stalemate. The US has begun flying predator drones – but has yet to deploy the A-10 Warthog ground-attack aircraft or AC-130 gunship, both effective against ground forces.

Post-conflict implications

How this war is being fought matters in the long term because it will help to define a post-conflict Libya’s relations with the West. The TNC insists that no Nato forces should join the land war. But on the streets, the attitude is different. We interviewed dozens of Benghazi residents, including one imam leading prayers in the town’s main square: each of them said he wanted Nato troops on the ground.

Such a prospect isn’t palatable for many Nato members. But the UK on 19 April said it would dispatch a dozen “military advisors”, along with protective armour, to help the rebels. France and Italy later agreed to send personnel, too. Some UK military figures, such as Michael Jackson, the former General Chief of Staff who led the military’s Kosovo campaign, argue that the UN Security Council resolution 1973 prohibits only “occupation” – but all other means to “protect civilians” should be considered. Nato mission creep is dreaded by the group’s less committed members, but may be the only way to break the deadlock.

And a war against Qadhafi won by Nato may leave a less-damaging legacy than if the rebels claim the victory for themselves. The role of rebel troop leader General Abdel-Fattah Younis, a former loyalist who has already switched sides twice, in post-conflict Libya is uncertain. By most accounts, he is a charismatic leader. But his ambitions aren’t easy to discern.

Nor are those of General Khalifa Hifter, who also claims leadership of the rebel army. The two rivals have done nothing to end confusion about who is in charge. The rebel army’s rank and file – scarcely connected to, let alone under the authority of, the civilian TNC – may prove difficult to contain if Qadhafi falls. To judge from the mood of some insurgents, avoiding a vengeful bloodbath in the west, should the rebellion triumph, would be difficult. That’s one reason Western powers have been reluctant to arm the east’s irregulars.

Distrust of Younis among some Libyans in the east is only matched by the suspicious attitude on the street to the civilians in the TNC. “Who are these people?” asks Aiman Areibi, a 24-year-old Benghazi airport worker. He also wondered how they were granted permission to leave Libya, a privilege bestowed on the regime’s elite.

That may be unfair. Tarhouni, for example, was put on a government assassination list after he fled Libya in 1973 and was a leading figure of the underground movement against Qadhafi while working as an economics lecturer at the University of Washington, Seattle. Hifter spent the past two decades in contact with regime opponents while living in Virginia. But Mustafa Abdul Jalil, chairman of the TNC, who now also has a bounty on his head, once worked alongside Qadhafi as his justice minister.

Outsiders might think such experience of government in Libya would be useful if Qadhafi falls. And Jalil has successfully charmed other leaders, such as Sarkozy. But convincing people on the ground that he represents a genuine break with the Qadhafi era will take time.

Weak profile

The profile of the TNC itself, which now operates from the palatial offices of the Egyptian consulate in Benghazi, remains weak, even in the east. Few of the anti-Qadhafi protesters we interviewed even knew it existed. “Useless, useless, useless,” was how one Western analyst described the fledgling government. Many of the members of the council, especially those representing towns in the east, haven’t even been named, for fear of reprisals. In a country fundamentally lacking civil society, a new civilian government has its work cut out.

The TNC also has some work to do to assert its organisational authority. Tarhouni’s plan to establish a new NOC in Benghazi, for example, has run into local opposition that could yet undermine the rebellion. Agoco – the rebels’ only hope for oil production – is refusing to co-operate with Waheed Bugaighis, the man Tarhouni appointed to hold the rebel government’s oil portfolio.

“He’s an old man who worked for NOC in 1982,” one Agoco source said, scornfully. Bugaighis, who has spoken of his need to root out corruption in the oil industry, visited Agoco and tried to dismiss senior executives on the same day that the Misla installations were attacked: bad diplomacy and bad timing. Agoco turfed him out.

TNC sources say Agoco retains too much of the “old Qadhafi-era” attitude, but a cloud hangs over Bugaighis’s future. For now, Agoco says money it earns from any exports will go to the TNC. But it will only deal with the council directly, not through Bugaighis.

Such squabbling is too reminiscent of the factional fighting in Baghdad after the US-led invasion of Iraq in 2003, says one analyst. Those internal Iraqi conflicts have scarcely been resolved seven years later. So internal battles now muddy the outlook for Libya’s oil sector if – and when – the rebels win their war. Tarhouni says he will make the “right decisions” for the economy and that Qadhafi-era economic infrastructure will be discarded only “if it is an obstacle”.

Beyond its immediate battle to sustain the rebellion, the TNC is already thinking big about a post-conflict Libya. Oil production, it believes, could quickly and easily reach 2m b/d and then ramp up to 3m b/d, almost twice the level before the rebellion. Agoco says there are plenty of untapped oil prospects. One new oilfield south of Benghazi, Soltan, where eight wells have been drilled and output has already reached 50,000 b/d, could be much more productive. Under Qadhafi, BP and other firms committed to exploring fresh prospects in vast basins both on- and offshore. No one doubts that growth in output is possible in the long term.

Investors needed

Investors and their cash will be needed in the oil industry, but their role as the country rebuilds could be just as great. Qadhafi, not war, has left the roads and other infrastructure in their appalling state, says Tarhouni. And the “private sector” will play a large role in the economy he runs. Qatar Petroleum, which will handle sales of rebel-produced crude until the TNC is able to manage such contracts, is likely to remain a key investor.

NOC, whose people “are not all bad”, according to TNC and Agoco sources, will continue to control the oil sector in a “free Libya”, although its boss, Shokri Ghanem, considered a Qadhafi stooge, won’t last a regime change. Like many of the government’s officials, he’s now the subject of personal UN sanctions. But if the regime ends, Libya’s petroleum industry, like its politics, will necessarily include people from both sides. The alternative is chaos after the war, too.

And the TNC will tap “expertise” from across the world, says Tarhouni. That should ring the bell for the West’s big services firms. Contracts signed in the Qadhafi era will be honoured “as a matter of principle”, Tarhouni says. But Libya “will remember its friends”, an assurance to the countries that have supported the rebellion – and a warning to those that haven’t.

Indeed, Agoco and the TNC say new, post-Qadhafi oil contracts will go to firms from countries that backed the uprising. France’s Sarkozy may have pushed for Nato action in Libya on humanitarian grounds, a feat that has earned him great popularity in Benghazi. But French major Total will be welcomed at the front of a new wave of Western investment in Libya.

Agoco and the TNC say new, post-Qadhafi oil contracts will go to firms from countries that backed the uprising

Agoco’s communications director, Abdeljalil Mayuf, said other “big” firms, such as Shell, BP, and ExxonMobil, would be ideal partners. But “smaller” companies from countries that have either supported Qadhafi or criticised Nato’s action – Algeria’s Sonatrach, Brazil’s Petrobras and Russia’s Gazprom – won’t be welcome partners, even if Tarhouni insists their existing investments will be protected.

That will yield conspiracy theories about why Nato is bombing Qadhafi’s forces. And, to be sure, Western commercial interests are being looked after. Christopher Prentice, the former UK ambassador to Baghdad now serving as the envoy to the TNC, met Tarhouni in Benghazi just before our interview. A fluent Arabic speaker, he’s said to have been a regular visitor. French diplomats met Agoco on the day we were with the company.

A regular stream of other oil-company representatives is said to have made the eight-hour road trip from the Egyptian border to the rebel stronghold. The boss of Eni, Paolo Scaroni, has already negotiated with the TNC, although Italy’s colonial past in the country makes its involvement awkward. Across Benghazi, the rebels have plastered images of Omar Makhtar, who died in 1931 fighting to liberate Libya from Italian fascist control.

And the TNC’s desperate pleas for cash now – a “life and death” issue, says Tarhouni – will leave it with a weaker hand when it comes to handing out contracts to generous donor-countries in future.

All of that is some way off. Stalemate or not, the conflict remains bloody. The growing death toll is already around 10,000, by some calculations. Civilians caught in besieged cities such as Misrata continue to die under shelling from Qadhafi’s forces, which are believed to have used cluster-bombs on the city. Rebel control of Misrata would open a port for vital humanitarian and other supplies.

For now, Libya’s war is between two armies trying to stop the other from getting access to fuel and energy. Stronger Nato military action could tip the balance. But control of oil in this conflict, as in others, will be decisive. The refineries and export terminals in central Libya’s coastal towns are battlegrounds. Tobruk, once crude production from Misla and Sarir resumes, could be the rebels’ ace, but only if Nato can protect the oilfields that feed it. The lines for fuel at Benghazi’s filling stations may be growing. But Tripoli’s are already longer.

As Petroleum Economist went to press, the US Treasury eased sanctions against the TNC, allowing the rebels to sell oil. The Treasury specifically authorised deals with Qatar Petroleum and Vitol “'related to oil, gas, or petroleum products exported from Libya under the auspices of the Transitional National Council of Libya”. The move creates an exception to February’s executive order which blocked transactions with Libya.

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